LDN - Business

Dollar climbs toward 16-month high after hawkish Fed guidance

[November 09, 2018] By Tom Finn

LONDON (Reuters) - The dollar rose toward a 16-month high on Friday after the U.S. Federal Reserve kept interest rates steady and reaffirmed its monetary tightening stance, cueing up investors for a rate hike in December.

The greenback fell broadly following U.S. midterm elections on Tuesday on expectations that the outcome would make further fiscal stimulus measures unlikely.

But the currency bounced back and on Friday returned to outperforming most major currencies, underpinned by the robust U.S. economy and rising interest rates.

"We're wary of selling the dollar too soon, because the Fed is still hiking rates into a tightening labor market and trade tensions haven't gone away," said Kit Juckes, chief FX Strategist at Societe Generale.

"The U.S.-Chinese wars of words go on, and the idea that a trade deal is almost done and will be rubber-stamped (at the G20) in Buenos Aires seems very optimistic."

The Fed is widely expected to raise interest rates in December, which would be its fourth hike this year.

Renewed strength in the dollar - which tends to appreciate from trade war tensions by acting as a safe haven - is pushing the Chinese yuan toward 7 per dollar <CNH=D3> and has seen the euro slip toward $1.13.

In foreign exchange markets, investor focus is shifting back to the divergence between the monetary policies of the United States and other major economies.

In Japan, where interest rates are seen staying extremely low, the yen <JPY=D3> is near a five-week low against the dollar and has fallen 2.2 percent over the last 10 trading sessions.

On Friday, though, the yen reversed course to trade up 0.2 percent at 111.86.

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A U.S. Dollar note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration/File Photo

The dollar index <.DXY>, a gauge of its performance against six major peers, traded at a one-week high at 96.916, not far from a 16-month high of 97.2 brushed on Oct. 31.

The euro <EUR=> traded at $1.1351, down 0.1 percent.

It fell on Thursday after the European Commission forecast that the Italian economy would grow more slowly than Rome thinks in the next two years, leading to much bigger budget deficits than assumed by the government.

A standoff between the EU and Rome over the budget deficit and concerns over the bloc's slowing economic growth have dragged on the euro, which has fallen 4.2 percent versus the dollar over the last six months.

The pound <GBP=D3> changed hands at $1.3015, down 0.3 percent.

The British currency has benefited recently from growing investor expectations that Britain is close to reaching a deal with the EU, less than five months before it is due to exit the bloc.

The Australian dollar <AUD=D3> lost 0.2 percent to trade at $0.7241. It tends to struggle when sentiment toward China - Australia's largest trade partner - weakens.

(Additional reporting by Vatsal Srivastava in Singapore; Editing by John Stonestreet and Alison Williams)

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